The Only Soft Commodity Worth Buying

Wyatt Investment Research

Ed. Note:

Welcome to the fourth and final installment of an extended, candid conversation I recently had with my colleague and seasoned journalist Chris Preston . We wrap things up with a discussion of two very different topics: my favorite soft commodity and the upcoming presidential election. If you missed Part 1 , Part 2 and Part 3 of our conversation, click on the preceding links.

Chris: Are there any soft commodities that you like better than others right now?

Kevin: The problem with soft commodities is that, unlike gold and silver, you can’t just buy a bushel of corn and put it in your safe deposit box and sell it later. That’s one of the best attributes of gold is that it doesn’t rot or spoil.

That said, I’m very interested in coffee. I drink a lot of it. I think I understand it. And that is another one of these markets where the acreage has been so constrained – you can’t grow coffee just anywhere. We can grow tomatoes up here in Vermont in the spring and summer time. But you can’t grow coffee unless you’re at a specific altitude and at a specific range between the Tropics of Cancer and Capricorn. And coffee is one of the most highly traded commodities in the world. I think it’s behind only oil and maybe iron. It’s the second-most consumed beverage in the world after regular old H2O.

So I think anytime you can buy a company that has upside exposure to higher coffee prices then you’re going to do well. And I don’t know if that company would be something like Starbucks (SBUX). I know they try to source their own beans and have their own contracts with coffee suppliers. But I don’t know how much pricing power they have. If coffee prices go up 50 percent, can they raise the price of a cup of coffee from $3 to $4.50? I don’t know.

Chris: If not Starbucks, what would you recommend? What do you like?

Kevin:   You know, I really like Green Mountain Coffee Roasters (GMCR) . We’re in Vermont here, and I live less than a mile from Green Mountain Coffee. But I don’t think that company’s the right play either because even their CEO admits that they’re not a coffee company – they’re a technology company. Selling their individual Keurig machines is where they make most of their profits. And to be honest, I don’t think their coffee’s very good.

I think a better play would be someone like Dunkin’ Donuts (DNKN). But they’re part of a parent company (Dunkin’ Brands), so you can’t just buy the Dunkin’ Donuts part. So there’s a challenge to that too. Maybe a way to profit from coffee would be to short Green Mountain Coffee if coffee prices get too expensive, because their Keurig cups are already too expensive on a per-cup basis. You know, you can brew a cup of coffee on your own for a quarter. Those things cost 75 cents. If that price disparity widens, you’re going to see people starting to pull their drip machines from the closet, if they still have them. And they’re going to buy bags of coffee. You know – assuming they still know how to make coffee!

Chris: One last thing I wanted to ask you about since you’re someone with very strong opinions. What are your thoughts on the upcoming presidential election?

Kevin: Well I think the only noticeable difference between Mitt Romney and Barack Obama is possibly the color of their skin and their religion. Besides that, if you take away their names and I gave you a blind taste test of their policies, I doubt that most voters would be able to tell the difference between the two of them.

And that’s not just referring to ObamaCare versus RomneyCare – Mitt Romney’s health plan when he was governor of Massachusetts, which is almost identical to the plan that Obama pushed through Congress. It’s everything from their foreign policy to their ideas about free markets. Both of these guys are clearly Keynesians, and by that I mean they believe that central banks, the Federal Reserve in particular, should control the supply of money to increase employment and control inflation. They’re both populists, they’re both very charismatic, and I think that regardless of who’s voted into power in 2012 it will be pretty much inconsequential to the stock market, to job growth, to the housing market, to whether or not the financial sector is continually bailed out.

The only real candidate who I think is any different than the rest of them is Ron Paul. I’m a fan of Ron Paul, but I don’t think it’s realistic to expect most of the voters out there who are beneficiaries of the Federal government to vote away their own meal ticket, which is essentially would be what they’re doing if they voted for Ron Paul.

So unfortunately, I think, one of these two guys is going to win.

Chris: When was the last time there was a race when there was someone who was very different? I mean I guess the last election Obama claimed to be different – or at least that was the bill of goods he sold people. When do you think there is legitimately going to be a realistic presidential candidate who is actually different?

Kevin: I don’t want to be overly pessimistic. I’m optimistic. I think things are eventually going to get better. But that’s not going to be because of who we voted for president.

There has never been a president who has created jobs. Presidents don’t create jobs. As much as it might anger people to hear me say this, Ronald Reagan didn’t create jobs. Unless he was a business owner – and I don’t think he was during his presidency – he didn’t create jobs. Bill Clinton didn’t create jobs. The advent of the Internet had something to do with that, but that wasn’t because of anything the government did.

The point is, things won’t get better with the help of the government. They’ll get better because people like you and me want better lives and have an incentive to work hard and who want to eat food and drink beer, want to buy nice cars and want to live a good life. That kind of self interest is what creates jobs.

But I’m optimistic that with the technology that’s going to be coming out in the next few decades, the world is going to be a much better place – despite the best efforts of people like Mitt Romney and Barack Obama. There are going to be investment opportunities in technology.

In the meantime, if you’re like me and don’t really understand technology, the best thing you can do is keep your hard-earned money out of the hands of the U.S. government.



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